Fibonacci Retracements

  • 09 Aug
    WDC was a good buy a few weeks ago; now it’s a GREAT buy

    WDC was a good buy a few weeks ago; now it’s a GREAT buy

    In late July, and just before they released their latest quarterly earnings report, I wrote about Western Digital Corporation (WDC) and the fact that the stock had dropped more than 28% below its all-time high at around $108. The stock was around $75 per share then, and following their earnings report, the stock plunged even more; as of this writing the stock is just a little above $66 per share. At the end of July, I thought the stock was a nice buy; after reviewing the stock’s latest earnings information, and taking the latest drop into account, I think it’s an even bigger bargain now.

    So what’s been driving the latest plunge (almost 11.5% since my last post about this stock)? Sometimes, the stock market makes sense – or at least, you can tie what a stock is doing at a given time to specific news, or to something about the underlying company that has some semblance of logic to it. Often, though, it’s downright maddening. I’ll admit that when I first saw WDC drop below $70 I struggled to tie it to anything concrete. I’ve kept digging, and while I think I’ve found a couple of threads to tie the decline to, the logic behind one of them makes me shake my head.



    Shortly after my post, WDC published its latest quarterly earnings report. The numbers were good across the board – every fundamental measurement I use in my analysis remained very healthy or improved, including the company’s Book Value. It was right after that report, however that the stock started to drop. At the same time, WDC’s only real competitor in the HDD space, Seagate Technology Plc (STX) released their own earnings report. STX’s report reflected a reality that seems to be scaring investors about either company, because sales of HDD drives continues to decline. In the consumer space, in particular, HDD clearly looks like a dying breed. And while STX is focusing more and more on the only market where HDD sales remain healthy – the enterprise, cloud server storage space – they don’t have a plan to evolve their business beyond that. WDC, at least in part, looks like a victim by association of STX’s poor report, which also prompted downgrades on that stock from analysts. That’s the part that makes me scratch my head, because anybody that thinks STX is in a better position than WDC to stay relevant has to be smoking something.

    The other thread I’ve found, and that the market seems to be teeing off on, is the fact that competition in the SDD and NAND space – memory types that are built on solid-state technology, and a major piece of WDC’s evolution strategy – is intensifying. WDC bought SanDisk in 2016 primarily because they knew that staying pat with HDD technology was a loser’s game; acquiring SanDisk immediately put them at the front of the SSD and NAND chip pack. There is market data that suggests supply of SSD and NAND chips is higher than demand right now. With more companies like Micron Technology (MU), Intel Corporation (INTC) and others making forays into the space, it isn’t a given WDC will maintain their leadership position in this segment. Intensifying competition, along with high supply clearly is also playing a role right now in the stock’s decline.

    Competition in any business segment is a normal thing, and while that increases the pressure on any company, a good management team doesn’t shy away from it. I really like WDC’s strategy, and I think that in the long run they’re doing the right things to keep their business growing. Their fundamentals remain excellent in the meantime, which really means that if the stock was a nice buy at $75, it’s a great buy now.



    Fundamental and Value Profile

    Western Digital Corporation (WDC) is a developer, manufacturer and provider of data storage devices and solutions that address the needs of the information technology (IT) industry and the infrastructure that enables the proliferation of data in virtually every industry. The Company’s portfolio of offerings addresses three categories: Datacenter Devices and Solutions (capacity and performance enterprise hard disk drives (HDDs), enterprise solid state drives (SSDs), datacenter software and system solutions); Client Devices (mobile, desktop, gaming and digital video hard drives, client SSDs, embedded products and wafers), and Client Solutions (removable products, hard drive content solutions and flash content solutions). The Company develops and manufactures a portion of the recording heads and magnetic media used in its hard drive products. WDC’s current market cap is $19.9 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings  grew more than 29% while revenue growth was modest, posting an increase of almost 6%. WDC operates with a narrow margin profile of about 1%. By comparison, STX’s margins are around 10%. I believe the difference is a reflection of the company’s differing approach to growth; STX focuses almost exclusively on the higher margin aspect of increasing enterprise demand, while WDC takes a two-tiered approach by meeting enterprise demand for HDD drives while also pushing hard on innovation and evolution with SSD storage.
    • Free Cash Flow: WDC’s free cash flow is very healthy, at almost $3.4 billion. That translates to a free cash flow yield of almost 17%, which is much higher than I would normally expect given the company’s narrow operating margins.
    • Debt to Equity: WDC has a debt/equity ratio of .95. That number declined from a little above 1 two quarters ago, as long-term debt dropped by more than $1 billion. Their balance sheet indicates their operating profits are more than adequate to repay their debt, and with almost $5 billion in cash and liquid reserves, the company has excellent financial flexibility, which they plan to use to pay down debt, repurchase their shares and consider other strategic acquisitions.
    • Dividend: WDC pays an annual dividend of $2.00 per share, which translates to a yield of about 3% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for WDC is $38.53 and translates to a Price/Book ratio of 1.7 at the stock’s current price. Their historical average Price/Book ratio is 2.12. That suggest the stock is trading right now at a discount of a little over 19%, which is attractive; to support that opinion, the industry average is 4.6. That suggests the stock could be even more significantly undervalued right now. Using a long-term target price above $140 is probably over-optimistic since the stock’s highest price was reached in late 2014 around $110; however if the company’s evolution strategy is correct, as I expect it to be, that historical high is useful.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The red diagonal line measures the length of the stock’s intermediate downward trend, and also informs the Fibonacci trend retracement lines shown on the right side of the chart. The stock broke below strong support from repeated low pivots since late last year at $75, which has really driven the stock’s bearish momentum. The Fibonacci analysis shown on the chart above makes it hard to see where the stock’s next support level is likely to be. The upward trend that ended in March actually began in March 2016 at a low of around $35 per share; applying the same Fibonacci calculations to that trend puts the 61.8% retracement level at around $62.50, meaning that the stock is nearing the next important support area.
    • Near-term Keys: The stock is already offering a significantly discounted price relative to where I think it’s long-term potential lies. The truth is that if you went long on this stock in late July, you’re probably trying to decide what to do to manage the position now. I think there is more than adequate argument to hold on and ride out the stock’s current downward trend; but if you want to limit your risk, using a stop loss 25% below your purchase price would be a smart, conservative approach. If you’re thinking about trying to short the stock or start working with put options to take advantage of downside, the best signal for that kind of trade came at the end of July, so that opportunity has come and gone. The next signal for a bearish trade would come if the stock continues to break down and drops below $62. That could see the stock drop another $10 lower to around $51 or $52.


  • 30 Jul
    Is Eastman Chemical a value or momentum play? 

    Is Eastman Chemical a value or momentum play? 

    A smart investor doesn’t really try to track the entire market to find new investments to make. Given the thousands of publicly traded companies on U.S. stock exchanges alone (around 5,000 on the NYSE or NASDAQ exchanges), it really isn’t very practical to think that any individual is going to be able to track them all. Instead, the most successful investors I’ve known over the years keep track of just a handful of stocks at any given time. Over the years, I’ve worked with lists as small as a couple of dozen and upwards of 100 stocks at any given time, but have never really expanded my active list (the ones that I actually check every day) beyond a dozen or so. That’s been true for me through two recessions and three bull markets, and it’s applied to my use of investing strategies that included short-term methods like swing and trend trading and longer-term philosophies like value investing.

    Working with smaller lists makes the process of tracking the market more efficient and manageable, especially if like most people, investing is just a single part of your busy lifestyle. Few people have the time to spend all day, every day watching the market from open to close, combing through one earnings report after another. The truth is that you don’t have to; if you can put together a smaller, functional basket of stocks to work with, you’ll usually find it’s more than sufficient to keep you busy while still giving you plenty of opportunities to work with.



    As a value investor, my active list stays pretty fluid. I prefer to focus my attention from one day to the next on the stocks that I know are working at valuation levels that I know I can work with. But since an undervalued stock today will hopefully not be undervalued in the future, I often move stocks out of my active list once I close a profitable position on them or they move out of a trading range I think gives me a good value opportunity. I don’t stop watching those stocks, but my check on them becomes more sporadic. That is also true when I see a stock extending an upward trend that I don’t already have an open position in. If it’s moved beyond the point that I think represents a good value, I simply put into a secondary list, which means I’ll come back to it at some point in the future.

    The interesting thing about some of those stocks is that sometimes I’ll decide to take a look at a stock I’ve used in the past at lower prices, and I’ll find that while the stock may be much higher now than it was when I invested in it previously, some of its other fundamental information – like Book Value, for instance, may have also improved significantly. In fact, they may have improved enough that the stock’s latest high price still represents a nice value. That’s an interesting wrinkle in the game for a value-oriented investor like me, because it helps to keep my active list fresh with companies I’m already familiar with, but that haven’t been a daily part of my market check for a while. It’s like coming back to an old friend to get reacquainted.

    This morning I circled back to one of those old friends. Eastman Chemical Company (EMN) is a stock I first used in late 2016 when it was trading around $65 per share. As of this writing the stock is above $101; its rise began around the same time I started paying attention to it, and after I closed the position I took in the stock (at a nice profit, by the way) it rose even more quickly, to the point that I decided to shift it out of my active list. The stock’s upward trend continued almost unabated, driving the stock to a high around $110 in the first quarter of the year before finally dropping back a bit to hover around $100 for most of this month. That drop of about 10%, and seeing the stock consolidate around its current level, prompted me to take another look at the company’s fundamentals and its value proposition. There could be a nice opportunity to work with if you prefer to work with a shorter-term momentum method; from a value-oriented approach, I would still prefer to see the stock offer a better price. Here’s what I found.



    Fundamental and Value Profile

    Eastman Chemical Company (Eastman) is an advanced materials and specialty additives company. The Company’s segments include Additives & Functional Products (AFP), Advanced Materials (AM), Chemical Intermediates (CI), and Fibers. In the AFP segment, it manufactures chemicals for products in the coatings, tires, consumables, building and construction, industrial applications, including solar energy markets, animal nutrition, care chemicals, crop protection, and energy markets. In the AM segment, it produces and markets its polymers, films, and plastics with differentiated performance properties for end uses in transportation, consumables, building and construction, durable goods, and health and wellness products. The CI segment leverages large scale and vertical integration from the cellulose and acetyl, olefins, and alkylamines streams to support its specialty operating segments. Its product lines in Fibers segment include Acetate Tow, Acetate Yarn and Acetyl Chemical Products. EMN’s current market cap is $14.4 billion.

    • Earnings and Sales Growth: Over the last twelve months, earnings  grew about 12% while revenue growth increased a little over 8%. Growing earnings faster than sales is difficult to do, and generally isn’t sustainable in the long-term; but it is also a positive mark of management’s ability to maximize business operations. The company’s Net Income for the last twelve month was almost 15% of Revenues, with this number decreasing only slightly to about 13% in the most recent quarter. 
    • Free Cash Flow: EMN’s free cash flow is healthy, at $981 million. This is a number that has increased significantly over the past year, from about $650 million.
    • Debt to Equity: EMN has a debt/equity ratio of 1.12, implying they use a fair amount of debt. The company’s balance sheet indicates their operating profits are more than adequate to service their debt, with good additional flexibility from cash and liquid assets.
    • Dividend: EMN pays an annual dividend of $2.24 per share, which translates to a yield of about 2.21% at the stock’s current price.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for EMN is $39.40 and translates to a Price/Book ratio of 2.56 at the stock’s current price. Their historical average Price/Book ratio is 2.8, implying the stock has somewhat limited upside. A move to par with its historical average would put the stock a little above $110, and right in the range of the all-time highs it hit earlier this year. That’s not horrible, but with only about 10% upside, it isn’t quite compelling enough to motivate a value-oriented, long-term investment.


    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s upward trend until March of this year and provides the reference for calculating the Fibonacci retracement levels indicated by the horizontal red lines on the right side of the chart. The stock has significantly retraced its upward trend after hitting an all-time high around $112, and is now hovering around its 38.2% Fibonacci retracement line, which has provided a pretty solid level of support for the past month. That is a positive for momentum-based trading methods, implying a push back into the $110 area is a good possibility. In cases like this one, I also like to use moving averages (not shown on this chart) to identify a stock’s trends over different periods visually. The stock’s 200-day moving average, which is usually a very good indication of the stock’s long-term trend, is sitting right around the $93 level. That also coincides with the 38.2% retracement level if you extend the Fibonacci trend measurement over a two-year period, and with the 61.8% level shown on the chart above. Fibonacci analysts like to call that confluence; confluence means that multiple data points agree, which should improve their validity and reliability of that particular price level.
    • Near-term Keys: If you like to work with trend-based, momentum-focused trading methods, the stock’s current price level looks like a very good retracement level. If the stock can pick up bullish momentum, a push to the $110 to $112 level is a very good possibility, and a push above $112 would mark a validation of the longer-term trend and should see the stock push to even higher levels. As a value investor, I would be far more interested in the stock at around the $93 level; at the stock’s current Book Value that would offer a more attractive value argument than what exists to day, and it would fall in-line with the confluence analysis I just outlined. A bearish trade, either by shorting the stock or working with put options, is a high-risk, low-probability approach right now, without a great deal of upside to offer in exchange.


  • 17 Jul
    CPB could be an interesting value play

    CPB could be an interesting value play

    The Consumer Staples sector is segment of the economy that has underperformed the rest of the stock market, at least until the last few weeks. Trade tensions seem to be one of the primary factors right now that have increased uncertainty enough to prompt investors to start paying more attention to industries that fit into a more “defensive” economic profile, which means that stocks like Kroger Company (KR) and General Mills (GIS) in the Food Products industry, and CVS Health Corp (CVS) and Walgreens Boots Alliance, Inc. (WBA) have been getting a little more attention. CPB is another stock in the Food Products industry that is offering some pretty attractive opportunities right now.

    Like GIS, Campbell Soup Company’s (CPB) stock price suffered from criticism in the media about the company’s appeal to the growing Millennial target demographic, whose preferences seem to point away from traditional names to smaller, more “organic” brands. The concern is warranted, as it is incumbent on any company to make sure their products align with consumer tastes and preferences, no matter how well-established they may be. That said, there is a lot to be said for a company with the kind of name recognition and history behind it that CPB carries. Their fundamentals are quite strong, and their value proposition is more interesting now that it was just a couple of months ago. 

    Smaller and more buzz-worthy (and generally more expensive at the grocery store register) brand names right now certainly have their appeal; but one of the reasons CPB is seen as a defensive stock also comes because of their ability to make their products available at cheaper prices. If and when the economy begins to slow, more expensive, currently “sexier” products will likely be challenged to retain their sales and profits far more than better established, more affordable alternatives.



    Fundamental and Value Profile

    Campbell Soup Company (CPB) is a food company, which manufactures and markets food products. The Company’s segments include Americas Simple Meals and Beverages; Global Biscuits and Snacks, and Campbell Fresh. The Americas Simple Meals and Beverages segment includes the retail and food service channel businesses. The segment includes the products, such as Campbell’s condensed and ready-to-serve soups; Swanson broth and stocks; Prego pasta sauces; Pace Mexican sauces; Campbell’s gravies, pasta, beans and dinner sauces; Plum food and snacks; V8 juices and beverages, and Campbell’s tomato juice. The Global Biscuits and Snacks segment includes Pepperidge Farm cookies, crackers, bakery and frozen products; Arnott’s biscuits, and Kelsen cookies. The Campbell Fresh segment includes Bolthouse Farms fresh carrots, carrot ingredients, refrigerated beverages and refrigerated salad dressings; Garden Fresh Gourmet salsa, hummus, dips and tortilla chips, and the United States refrigerated soup business. CPB’s current market cap is $12.4 billion.

    Earnings and Sales Growth: Over the last twelve months, earnings and revenues have both increased, with earnings growth outpacing revenue growth (18.6% to 14.6%). Growing earnings faster than sales is difficult, and generally isn’t sustainable in the long term, but it is also a mark of management’s ability to maximize its business operations and manage costs. It should be noted that the company’s Net Income is less than 5% of Revenue, which indicates that they operate with a very narrow margin profile.

    • Free Cash Flow: CPB’s free cash flow translates to a Free Cash Flow yield of about  7.5%, which is less than I prefer, but still adequate. CPB’s total Free Cash Flow for the past year was $938 million, a number that has declined since the last quarter of 2016, when Free Cash Flow was a little over $1.15 billion.
    • Debt to Equity: CPB has a debt/equity ratio of 5.73. This number increased dramatically in the last quarter and makes CPB one of the most highly leveraged companies in the industry; the increase came as a result of the company’s acquisition of snack food maker Snyder’s-Lance in March of this year. Even with the increase, their balance sheet indicates operating profits are more than sufficient to service their debt, with adequate liquidity as well.
    • Dividend: CPB pays an annual dividend of $1.40 per year, which at its current price translates to an annual yield of about 3.39%. This is above the industry average as well as the S&P 500 average of 2.0%.
    • Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for CPB is $4.69 and translates to a Price/Book ratio of 8.78; this is generally above the level I prefer and is significantly above the industry average of 2.3. More importantly, however, the stock’s 5-year average Price/Book ratio is 10.5. A rally to par with its historical average would put the stock above $49. That offers an upside of almost 19% over the stock’s current price.



    Technical Profile

    Here’s a look at the stock’s latest technical chart.

     

    • Current Price Action/Trends and Pivots: The red diagonal line traces the stock’s 2-year downward trend, from a high around $67 per share to a trend low early last month a little below $33 per share. The stock has rebounded from that point and is currently hovering in a narrow range between support around $40 and resistance in the $42.50 range. The red horizontal lines on the right side of the chart mark the stock’s Fibonacci trend retracement levels, which I expect to act as resistance against a reversal of the current downward trend. The stock would have to break two levels of resistance to reach the $49 target offered by the Price/Book analysis I outlined earlier. That isn’t unattainable, and if the stock can maintain the strong momentum it has shown since the beginning of June, it isn’t unreasonable to suggest that the stock could reach that level before the end of the year. On the downside, a drop below the stock’s current support around $40 would reconfirm the long-term downward trend, with support not expect to be seen until $34 or $35 per share.
    • Near-term Keys: A break to the $43 price range could act as a good signal to enter a bullish position on this stock, either by buying the stock outright or working with call options. If you’re working with a short-term trade, look for an exit in the $45 – $46 range; if you’re willing to work with a longer-term time frame, the $49 level marked by the 50% retracement line is a nice target. If the stock breaks down below $40, you might consider working with a bearish trade, either by shorting the stock or using put options.


  • 21 May
    Sunday Edition: How The Other News This Week Makes For A Possible Buying Opportunity

    Sunday Edition: How The Other News This Week Makes For A Possible Buying Opportunity

    There was a story this week that was largely overshadowed by all the noise in Washington.

    An unprecedented cyber attack, the WannaCry ransomware attack, began infecting tens of thousands of computers all over the world on Friday, May 12.

    By Monday morning, there were reports that the attack had hit targets like Britain’s National Health Service, the Russian Interior Ministry, FedEx, French carmaker Renault, and Spanish telecommunications firm Telefónica. More →

  • 07 May
    Sunday Edition: When AMD’s Chart Was A Crystal Ball

    Sunday Edition: When AMD’s Chart Was A Crystal Ball

    A few weeks ago I wrote an article for our sister publication Direction Alerts about a technical pattern I had spotted on semiconductor company AMD.

    What I had found at the time was a head and shoulders formation that I determined would see the stock price falling and giving investors an opportunity to buy this growth stock at a discount. More →

  • 23 Apr
    Sunday Edition: What Ever Happened To 3D Printing?

    Sunday Edition: What Ever Happened To 3D Printing?

    Have you ever read about or seen a new technology in action and thought to yourself “I’ve arrived in the future”?

    With the explosive rate at which technology has been moving in this century alone, I imagine the answer is a resounding “yes!”

    A few years ago, much of the hype about the future today was focused on 3D printers. Personal 3D printers were suddenly on the market for $1,000, and then $500, and then $300, and buyers of these printers imagined themselves not only designing and developing products of their own, but also printing and replacing broken parts, all in the comfort of their own homes. More →

  • 30 Oct
    Sunday Edition: How High Will Gold Go Over The Coming Decade?

    Sunday Edition: How High Will Gold Go Over The Coming Decade?

    Today we are going to analyze the long-term technical picture in the Gold market and introduce you to another nuance of the Elliott Wave Theory. It’s going to get a bit more technical.

    Up to this point we have primarily discussed the basic A-B-C pattern known as a zig-zag which follows the completion of an impulse or motive wave and looks like this: More →

  • 09 Oct
    Sunday Edition: The Most Important Pattern In A Bear Market Bottom

    Sunday Edition: The Most Important Pattern In A Bear Market Bottom

    Over the last several months we’ve focused on sharing with you several of the fundamental metrics Thomas Moore uses to identify deeply undervalued companies on which to sell put options to generate income. We hope they’ve been beneficial.

    In today’s Sunday Edition I’m certain to draw a lot of skepticism from those “purists” who believe that markets are both efficient and driven exclusively by the fundamentals.

    On the other hand, if you believe that markets are not only irrational but are driven by psychology and what some like to refer to as “animal spirits,”  then you might appreciate what I share over the next several weeks in these Sunday Editions. More →